The Employee Ownership Update

Corey Rosen

November 28, 2006

Leading Democrat Calls for Broader Stock Options

Congressman Rahm Emanuel (D-IL) gained recognition this year for heading the House Democratic Campaign Committee. In his book with former Clinton aide Bruce Reed, The Plan: Big Ideas for America, Emanuel argues that no CEO should be allowed to get options unless all workers are offered options.

ESOPs Play Surprisingly Large Role in Private Retirement Plans

New data from the Employee Benefit Research Institute (EBRI) shows that just 56.8% of working adults between ages 21 and 64 are eligible for a retirement plan and only 45.1% actually participate in a plan. The numbers are even more dismal for employees in companies with 10 to 100 employees, where only 31% participate in a retirement plan. Most of these workers are in defined contribution plans. Only about 20% are covered by traditional pension plans. In 401(k) plans, other EBRI data have shown that the typical employer contribution comes to only about 3% of eligible pay.

There are about 10 million participants in ESOPs and plans that function much like them, meaning ESOPs account for close to 20% of all private sector plan coverage for working adults (a precise number is not possible because we do not know how many ESOP participants are under 21 or over 64). The typical corporate contribution to ESOPs is about 8% to 10% in privately held companies; more importantly, a very large majority of ESOPs sponsor an additional retirement plan. Recent data are not available for public company ESOPs, but most of these are used as 401(k) matches, and they would tend to be at similar levels as other 401(k) contributions.

ESPPs Becoming Somewhat More Restrictive

In the most comprehensive study available on employee stock purchase plans (ESPPs), the research firm Equilar has found that 21.4% of the Russell 3000 companies (the largest 3,000 public companies) with ESPPs conform to the new "safe harbor" accounting rules that allow companies that offer no look-back features on their stock and a 5% or less discount at the time of purchase to avoid recognizing any expense for the plan on their income statements. As we have noted before, it is arguably irresponsible for a company to promote such a plan to employees. Employees usually must put aside cash over six months or longer with no interest and incur a small risk that between the time they exercise and time the transaction actually clears (usually a day or two later), the stock price could fall. Among new plans introduced in the last year, 41.5% have a safe harbor provision, but only 8.1% of plans founded more a year ago and amended in the last year have this provision.

Overall, approximately 60% of the plans provided a 6-month offering period, while 15.8% had a 12-month period. Based on other surveys done in prior years, these percentages show little change over the last several years. Interestingly, amended plans were about twice as likely as new plans to increase the offering period.

The total dilution represented by ESPPs has shown some decline, with just over 40% having dilution accounting for less than 1% of all shares, while 71.6% came in less than 2%, up from 61.8% in 2005. The number of plans with over 10% dilution fell from 10% in 2005 to 3.9% in 2006. This change could be the result of plan designs that cap the amount an employee can put aside, lower participation from employees responding to the plans that follow the safe harbor rules (these plans are not likely to attract more than 10% participation), or companies putting a cap on the total shares available.

The results are similar to previous more limited surveys that suggest a minority of companies with ESPPs are either abandoning them altogether (about 5%) or abandoning them all but in form and adopting the new safe harbor rules. The majority that are keeping their plans are "tweaking" them instead of making major changes.

ESOPs in Large Public Companies

The NCEO is currently working on a project to be released in 2007 that will provide data on the percentages of ESOP-only and combined 401(k)/ESOP plans in the 900 largest public companies. In 2004, the last year for which reliable data were available, 110 of these companies had such plans; 35 had plans owning more than 5% of their shares, and 10 had plans owning over 10%. Procter& Gamble, with 27% of its stock in its employee ownership plans (as of its 2006 SEC filings) had the largest plan. Overall, the data indicate there are about 485 ESOPs in public companies, or about 5% of all ESOPs. Data were taken from Form 5500 forms, except in the rare cases where companies included information about their plans in 10-k or other securities filings.

Don't Try This at Home

An NCEO staffer notes that at his gym, there is a suggestion box prominently by the door. The box has a note on it (and has for some time) saying that suggestions placed in the box will not be reviewed. We could suggest that the box be removed but, of course, that suggestion would not be reviewed either. While it's an extreme case, it's not the first time a company said it wanted feedback from employees or customers but then pointedly ignored it.